European Union foreign ministers have permanently lifted all sanctions against Myanmar, generally known as Burma, apart from an arms embargo.
The decision was welcomed by opposition leader Aung San Suu Kyi, but Human Rights Watch called the move premature, saying the government is committing crimes against humanity and ethnic cleansing in some areas.
The EU meeting warned that Burma needed to address "significant challenges", particular regarding its minority Muslims. A statement said:
"In response to the changes that have taken place and in the expectation that they will continue, the Council (of ministers) has decided to lift all sanctions with the exception of the embargo on arms."
The decision came in response to political reforms implemented by President Thein Sein, who came to power after elections in November 2010. His administration has freed many political prisoners and relaxed censorship.
British Foreign Secretary William Hague said Burma's political progress was substantial enough and serious enough for the temporary lifting of sanctions to be made permanent.
But he told the BBC:
"The work of the EU in Burma is not remotely finished. It is important to continue working on improving human rights, on improving the humanitarian situation, in helping the Burmese to address issues of ethnic violence, particularly attacks on Muslim communities."
Ms Suu Kyi, who for years supported sanctions against the country's military rulers, backed the EU decision, telling the BBC the democracy movement could not depend on sanctions forever.
"It is time we let these sanctions go," she said. "I don't want to rely on external factors forever to bring about national reconciliation which is the key to progress in our country."